How far have we really come on the path of financial inclusion in India? Are Indian small businesses getting real support or are policy fixes still covering up underlying structural cracks? In this wide-ranging interview with FE Online, former SBI Chairman Rajnish Kumar delves into the realities of MSME lending, the challenges of risk mitigation, the hard truth around payment banks, fintechs, and the regulatory framework.
Kumar argues that concerns around banks being too cautious with MSME credit are misplaced, pointing instead to a 15–16 per cent annual credit growth rate as an indicator of the system’s capacity rather than a lack of intent. But he underscores a critical point that businesses cannot rely on government-backed guarantees forever, even as government intervention in enabling credit is important.
He also shares his perspective on the formalisation of MSMEs, co-lending reforms by the Reserve Bank of India, the significance of regulation in money markets, and the broader effects of global tariffs.
Edited excerpts:
Do you think financial institutions are still risk-averse to MSMEs?
I don’t think that there is too much risk aversion. The only thing you go by is how your past experience in financing a particular sector has been. If the MSME credit growth is at 15-16 per cent in the last two years, then that is the capability of the system (financial institutions). I don’t think it (credit) can grow more than that. If the credit growth is 15-16 per cent, how can we say that the system is risk-averse.
So, is the rate of MSME credit growth good enough?
The capability of the economy to absorb high growth is not there in my view. It can lead to a lot of inflationary pressures and other implications. The growth in credit and the nominal growth in GDP are more or less aligned.
Do you see risk mitigation still a major challenge in MSME lending?
The government supports a lot in risk mitigation, for example, there are CGTMSE and Mudra schemes to provide loans and credit guarantees which have helped banks. But ultimately by providing the guarantee mechanism, there is a little bit of market distortion also.
Why distortion? Should there be no subsidies?
I am not saying there cannot be any subsidies because ultimately, if the cheaper credit to certain sections of the society has to grow, then somebody has to provide that subsidisation. If the segment is risky, you (bank) will charge a higher price (interest rate). If there is less risk, you will charge a lower price. But if it is a high price, then the affordability becomes an issue, and no business can afford credit at 20 per cent or 25 per cent. It is a vicious cycle. A very high cost of capital can be very counterproductive. So, if the credit has to be provided at a lower cost, only the government can do it.
So, the support in terms of guarantee or subsidy can be provided forever?
No, it can’t be given forever. Ultimately, businesses have to become self-sustainable. However, if it is only the market-related pricing without government intervention, the flow of credit or what we call financial inclusion will be very difficult as lenders cannot charge a very high interest rate even though the risk profile of that borrower warrants a high rate.
Hence, if the money has to flow at a reasonable rate, some government interventions are required. I think there are mechanisms in many countries through which the government provides support to banks for loans to small businesses, because on their own and if left to the banks, the credit may not be available to businesses.
Credit is also a concern for a large number of units in the informal sector.
I think formalisation will happen. If the institutional credit has to flow, you have to have Udyam registration. The formalisation of the economy is happening through Udyam registration, GST registration and tax filing. You cannot avoid them if you are talking about institutional financing. There are also measures proposed by the Reserve Bank of India (RBI) recently, such as broadening the scope of the co-lending model where the respective strengths of a bank and an NBFC are brought together to benefit the borrower.
Do you see the role of payment banks in helping MSMEs even as they cannot lend?
Payment banks have not succeeded as of now. That is the reality. There are hardly any examples (of successful payment banks).
Why do you say so?
My experience is such that I consider it to be a sort of restrictive business model that doesn’t work. We have seen and have talked a lot about DFIs (development finance institutions), small finance banks, and payment banks, but ultimately it is the universal banks that flourish and ultimately the roadmap is also that the small finance banks should graduate to universal banks. Hence, my view is that anything which puts restrictions on the business model, it doesn’t succeed in the long run.
Fintechs also may not become universal banks. You think the fintech model is also flawed?
No. Digital lenders create a lot of enabling environment where using the technology you are bringing in operational efficiency. It is an efficient lending process. They help in loan origination and getting traction in a better way by using technology. They provide an efficient way of lending and collection.
Do you think regulations continue to be a major concern for business borrowers?
No, but when it comes to money, some law or regulation is required. Now, whether it is restrictive or whether it facilitates, that is the point to discuss, but when you are dealing with money, then regulation is a must. Because there are several aspects related to such as money laundering, terror financing or aspects related to intermediation where it is not your own money; you are lending somebody else money. So, regulation is a must.
Would there be an impact of US tariffs on India even as there is a 90-day pause?
When it impacts the country as a whole, then obviously everybody gets impacted. If the tariffs impact, say, for example, our exports or our GDP growth, then the impact will be visible down the line. If there is protectionism across the world and the economic growth gets impacted, then to say that we will not be impacted, I don’t think that would be the right statement.
Recently, at Startup Mahakumbh, Commerce Minister Piyush Goyal compared Indian and Chinese startup ecosystems, which drew flak from the startup community. What’s your take on it?
I think China is very different. They work in a very different environment and a very controlled environment. So, it is very difficult to say what they are doing is right or wrong. I won’t go into that debate. We have a very well-developed financial system, which is much more transparent. It is very difficult to compare the two ecosystems but in terms of technology, it is apparent that China is doing better than India. Everybody recognises that fact. But we have our own systems and we need to continue to work on them.